Should you dive in to buy-to-let investing?
Prices are plunging, markets are in turmoil - but, incredibly, now could be the time to put your money in property, writes Richard Dy
Buy low, sell high has always been the maxim. Invest against the flow. In that case, with headlines warning of apocalyptic property crashes and a mortgage crisis, could it really be a good time to be investing in bricks and mortar?
Experienced landlord James Fraser characterises the buy-to-let frenzy of recent years as being made up of two types of investor.
First, there are landlords like himself whose prime concern is finding property where the rental income covers the cost of the mortgage and delivers a small profit on top.
These gains are religiously accounted for, saved and hoarded against future rises in mortgage rates or other unforeseen expenses - and to fund future investments.
‘For most serious landlords, income and cashflow are the prime concern,’ says James, 40, who was an actor before becoming a full-time landlord.
The other type of landlord, he says, is the more speculative and often less experienced investor who bought property hoping to profit purely from its rise in price.
Seduced by the claims of property clubs, such as the now defunct Inside Track, many hoped to profit from owning a property even before it was built. That kind of speculation worked for some, James admits, though it has been the ruin of others (see below).
James reckons there is nothing left in today’s property market for short-term speculators. But for long-term landlords, prospects are brightening.
‘When prices were rising strongly, yields - rental income versus the property’s value - were falling. Now, as property values are dropping, these yields are rising.’
A jump in tenant demand is helping, he says, by allowing him to push up rents. The growth in demand comes from people who cannot afford to buy, or who are holding off from buying in the hope of further price falls.
James owns 20 properties in his home town of Stevenage, Hertfordshire, all post-war, three-bedroom, terraced, former local authority houses that he lets to young professionals and families.
He knows these properties and the neighbourhoods intimately. He knows how to price, advertise and maintain them and precisely how much he needs to charge to clear his mortgage and other overheads.
He can let such houses for £750 a month. A year ago, he says, they might have cost £165,000 to £175,000, giving a yield of 5.1%. Now he could probably buy one for less than £150,000 and push up the rent to £800 - giving a yield of 6.4%.
‘Mortgage costs are negating some of these gains,’ he says. But if he keeps down his borrowing, the numbers still work.
James aims at rental income delivering at least 20% above mortgage costs. With best-buy landlord mortgage rates at 6.4%, if James puts down £50,000 and borrows £100,000, his monthly interest-only payments would come to £533, generating a £267 monthly profit from a £800 rent.
Even if that £267 was not defrayed by other costs, such as maintenance, it would still make a yearly return of only 6.4% on his £50,000 capital -comparatively unattractive beside the seven per cent-plus that cash on 12-month deposit can earn today.
‘Times have got tougher,’ he says. ‘You do need to put more money down. And releasing equity from your existing properties by remortgaging has got far harder.’
Further growth in the number of tenants and rental income, plus falls in property prices, will work to his advantage.
Source: This is money
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